I am responding as someone who wants free markets. I want to make one thing
clear before I proceed. We have no free markets anywhere today. Without constant
government intrusions into the markets, the paper currencies would have collapsed
already, and there would not be a "price" of money (i.e. gold and silver) quoted
in terms of dollars. In this sense, all markets are manipulated by the central
banks and their regime of falling interest rates.

I am compelled to respond to your allegation of "manipulation", because I
believe you mean it as the naked selling of silver futures (and others also
include gold futures in the same scheme). This is not occurring, and I have
data to prove it.

You express the central issue as follows:

"None of this makes much sense, as who would buy or hold such a giant physical
position and super aggressively short it in a concentrated manner?"

Why indeed? Why would someone buy a bar of silver and then sell a future against
it? I reframed the question in this way, to make it clear why someone would
do it.

To make a profit.

To "carry" a commodity means to buy the physical good and simultaneously sell
a future against it. The market is offering a profit to the warehouseman. It
is giving him a signal in the form of a positive spread between the spot market
and a futures contract. It is saying "please hold this good for a while, so
consumption is even throughout the year."

This is part of what I referred to earlier, when I said the whole system is
manipulated. In a free market, there would be no such thing as a futures market
in money itself. The high stocks to flows ratios (inventories divided by annual
mine production) means there is no value added by a futures market in the monetary
metals.

In any case, let's look at this spread mechanically. To carry a good, one
buys it in the physical, or spot, market. One must pay the ask. Simultaneously,
one sells the futures contract, on the bid. This is the basis.

Basis = Future(bid) - Spot(ask)

If the basis is positive, then that means the market is offering an incentive
to carry the good.

This is how the financial world operates today, whether we like it or not.
So long as the basis is greater than one's cost of capital, one would put on
this position in very large size. I assume JP Morgan can borrow at near-zero
interest rate.

Now, let's get back to the basis. There is a simple mechanic here that will
help us understand if the allegation is true, that JP Morgan is selling naked
futures. To sell a future, one must sell on the bid. This will, of course,
press down the bid. And this is indeed the whole point, according to the manipulation
theory. They are trying to push down the price.

What happens to the basis if the bid on the future is pushed down? The basis
falls. If they sold massive quantities of futures, the basis would go negative.
To oversimplify slightly, this is called "backwardation".

However, silver did have it. All long-dated futures were backwardated for
a period of time. It was when the silver price rose from around $18 to over
$40. This is the opposite of what the manipulation theory would predict, but
it is what basis analysis predicted. Backwardation was not caused by naked
selling of futures, which is supposed to drive down the prices. It was caused
by scarcity of the good in the physical market, which relentlessly drove up
the ask on spot.

Since then, backwardation in silver has been receding and it is all but gone
today. The price fell sharply in April 2011, and since then it has moved down
and sideways (and is now up recently around the QE3 announcement).

I watch the gold and silver basis constantly. I can assure you that there
are no sharp backwardations to coincide with the many calls that a big player
has just shorted futures that. It simply is not in the data. I reiterate that
it would be impossible to sell enough futures to move the price down without
forcing a large and growing backwardation.

I will close with a now-infamous quote from President Bush during the depth
of the financial crisis in 2008. "I abandoned free market principles to save
the free market system."

I think we both want the same thing: a free market in gold, silver, and credit.
But we will not move forward to it by calling for more government regulators,
more rules, and more picking winners and losers by government coercion. We
can only move forward by revoking the legal privilege given to the "too big
to fail" banks.

Mr. Butler, can we agree on repealing the legal tender laws that force all
creditors to accept the government's paper scrip for all debts? I think this
would be a good start.

Keith Weiner is CEO of Monetary Metals, a precious metals fund company in
Scottsdale, Arizona. He is a leading authority in the areas of gold, money,
and credit and has made important contributions to the development of trading
techniques founded upon the analysis of bid-ask spreads. He is founder of DiamondWare,
a software company sold to Nortel in 2008, and he currently serves as president
of the Gold Standard Institute USA.

Weiner attended university at Rensselaer Polytechnic Institute, and earned
his PhD at the New Austrian School of Economics. He blogs about gold and the
dollar, and his articles appear on Zero Hedge, Kitco, and other leading sites.
As a leading authority and advocate for rational monetary policy, he has appeared
on financial television, The Peter Schiff Show and as a speaker at FreedomFest.
He lives with his wife near Phoenix, Arizona.